New Car - Cash v Credit

cmcneill

Hi, Going to buy a new car soon. Question. Do I pay cash or credit, balance will be around £10K. Got the cash but am I better keeping that in the bank and taking out a loan? I beleive the interest earned would be more than interest paid. Thanks.

balsingh

Don't take the loan. If anything, the most moneysaving thing woudl be to buy a car where they are offering 0% for 3 years and then spread the cost and not pay an extra penny.

cmcneill

Is there not some logic in not tieing up my capital in a depreciating asset? We're looking to move house soon so might be better keeping the cash on hand?

Biggles

cmcneill wrote: »

Is there not some logic in not tieing up my capital in a depreciating asset? We're looking to move house soon so might be better keeping the cash on hand?

There is, but by taking the loan you are actually paying to tie your capital up in a depreciating asset, which is even worse!

To take a slightly higher mortgage, if it were necessary, would be cheaper than taking a loan. The only argument for keeping the money and taking a loan would be if you needed the money to make the minimum house deposit.

AdrianHi

Good question which a lot of people don't consider when calculating the total cost of ownership for their car.
If you pay cash you loose interest on your savings and / or pay out more on mortgage interest because that cash is not reducing your mortgage.
Offset that against the cost of financing the car another way and in most cases the mortgage/savings still turns out to be the cheapest source of finance for a car provided you clear the "car loan" element of the mortgage with mortgage overpayments equal to the capital you would have paid out on a car loan. Exceptions to that rule might be savings in an ISA which are subject to limits per year on what you can put in, once the year is over you've lost that tax break forever. Over the right period there is a chance an ISA return could beat loan costs.
The way to work this out is to compare the total cost of the car loan you might be considering with what it costs you to borrow the same amount on the mortgage over the same period and lost interest on any investments you might otherwise do.
Watch out for loosing access to better mortgage deals due to lower LTV (Loan To Value) on the mortgage because your deposit is smaller now the cash is in the car.
Consider a flexible "savings offset" mortgage.

If you have access to 0% finance, beware, because this kind of finance is almost always given on cars that depreciate fast, the cost of depreciation far out strips the cost of finance charges, so check out depreciation on the cars you are considering and then worry about financing it. "Finance charges are cheap, depreciation (on young cars) is expensive".

Buying nearly new with a big discount off list price and using your mortgage / savings to pay for the car will almost certainly be far cheaper than buying new on 0% finance and taking the depreciation hit.

cmcneill

Ok,

As the next house we buy, we'll probably have around 50% deposit, which means its not going to eliminate us from any mortgage deals.

Too much money to put in an ISA so I'd pay 40% on any interest, looks like buying the car in cash is the best plan.

Thanks for all the advice, clears up the differing sets of opinions!

AdrianHi

cmcneill wrote: »

Ok,

As the next house we buy, we'll probably have around 50% deposit, which means its not going to eliminate us from any mortgage deals.

Too much money to put in an ISA so I'd pay 40% on any interest, looks like buying the car in cash is the best plan.

Thanks for all the advice, clears up the differing sets of opinions!

OK safe on mortgage deals.

Have there been any changes to ISA rules that I'm not aware of?
The point of ISA's is the money you take out at the end is tax free so you will not be paying 40%.

In the end I'd agree the safer route is to pay cash for the car, no guarantee you'll get a good enough return on an ISA, though it really depends on your attitude to risk and how much time you have to retirement.